Treasuries Halt Four-Day Gain as ECB Debt Buys Reduce Concern

Nov. 18 (Bloomberg) -- Treasuries fell, snapping a four-day
advance, as Italian and Spanish bonds rose on purchases by the
European Central Bank to bolster markets as officials work to
address the sovereign-debt crisis.

European officials may start talks with the International
Monetary Fund on a mechanism for the ECB to lend to the
International Monetary Fund for sovereign bailouts in the
region, Dow Jones Newswires reported. The Treasury is scheduled
to sell $99 billion of notes next week and the Federal Reserve
is offering as much as $17.5 billion of Treasuries maturing in
less than three years at two sales.

“The market is waiting for the next shoe to drop to give
us direction one way or the other,” said Larry Milstein,
managing director in New York of government and agency debt
trading at R.W. Pressprich & Co., a fixed-income broker and
dealer for institutional investors. “We are ending the week
near the key levels of 2 percent on 10-year notes and 3 percent
on the long bond. The market is attracted to the round numbers
given the uncertainty in the market.”

Treasury 10-year yields climbed five basis points, or 0.05
percentage point, to 2.01 percent at 5:14 p.m. New York time,
according to Bloomberg Bond Trader prices. The 2 percent note
due November 2021 fell 14/32, or $4.38 per $1,000 face amount,
to 99 29/32. The yield declined five basis points this week.

Thirty-year bond yields rose one basis point today to 2.99
percent.

Futures Bets

Hedge-fund managers and other large speculators increased
their net-short position in 10-year note futures in the week
ending Nov. 15, according to U.S. Commodity Futures Trading
Commission data.

Speculative short positions, or bets prices will fall,
outnumbered long positions by 99,542 contracts on the Chicago
Board of Trade. Net-short positions rose by 3,367 contracts, or
4 percent, from a week earlier, the Washington-based commission
said in its Commitments of Traders report.

The Fed bought $2.5 billion of Treasuries due from 2036 to
2041 today as part of a plan announced in September to replace
$400 billion in shorter maturities with longer-term debt to cap
borrowing costs.

Treasuries have returned 9.2 percent this year as of
yesterday, according to Bank of America Merrill Lynch data.
German bunds advanced 8.4 percent and Japanese government
securities handed investors a 2.1 percent gain.

Spanish Bonds

U.S. government bonds gained for the week as borrowing
costs jumped at Spanish and French bond sales yesterday and a
Franco-German dispute over the ECB’s role in ending the crisis
added to concern that Europe’s most indebted nations won’t meet
their obligations. The crisis has driven up bond yields outside
Germany to euro-era records, helped bring down Greek and Italian
governments and threatened the survival of the euro.

“Ten-year Treasury yields have struggled to remain below 2
percent recently because data has lessened the chances of a U.S.
recession,” said Nick Stamenkovic, a fixed-income strategist at
RIA Capital Markets Ltd. in Edinburgh. “But European tensions
are giving Treasuries a firm underpinning.”

ECB President Mario Draghi today pressed governments to act
on promises to end the sovereign debt crisis, indicating he’s
not prepared to come to the rescue with large-scale bond
purchases.

Italy Banks

Italy’s five biggest banks, including Intesa SanPaolo SpA,
may need to raise a combined 6.1 billion euros ($8.3 billion) of
additional capital as the Italian government bonds they own
deteriorate in value.

“Unless an actual deal takes place or something seriously
negative occurs over in Europe, it’s going to be difficult for
us to break out of this range,” said Jason Rogan, director of
U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “It’s been
volatile but for the whole month we’ve been stuck between” 1.93
percent and 2.15 percent.

Economic Indicator

The index of U.S. leading indicators climbed more than
forecast in October, signaling the world’s largest economy will
keep growing in early 2012.

The Conference Board’s gauge of the outlook for the next
three to six months rose 0.9 percent, the biggest jump since
February, after a 0.1 percent September increase, the New York-based research group said today. The median forecast of 56
economists surveyed by Bloomberg News projected the gauge would
advance 0.6 percent.

Reports yesterday signaled improvement in the weakest areas
of the U.S. economy, with claims for unemployment benefits
dropping to the lowest level in seven months and housing starts
exceeding forecasts.

Economists at JPMorgan Chase & Co. in New York now see
gross domestic product rising 3 percent in the final quarter, up
from a previous prediction of 2.5 percent. Macroeconomic
Advisers in St. Louis increased its forecast to 3.2 percent from
2.9 percent at the start of November, while New York-based
Morgan Stanley & Co. boosted its outlook to 3.5 percent from 3
percent.

The 10-year yield will advance to 2.43 percent by the
middle of 2012, according to a Bloomberg survey of banks and
securities companies, with the most recent forecasts given the
heaviest weightings. An investor who bought today would lose 2.7
percent if the forecast is correct, data compiled by Bloomberg
show.